For previous Forum
attention to issues addressed in the article below, see the "Stock
Buyback Policy" section of the reference page for the Forum's 2014
project reviewing a buyback controversy, which includes in its
chronological news list the
following 2004 observations of the current article's author:

Note:
The statements of the Forum's chairman reported at the conclusion of the
article were intended to address examples in which competent
management should have been able to make effective use of capital. As indicated in the
March 18, 2016 Forum Report: Inviting Proposals of Candidates for Analysis of
Stock Buyback Policiesto which the article links, he does in fact
recognize the benefits of buybacks when appropriate to return capital
that is not needed to support a company's competitive production of
goods and services.

Not all stock
repurchases are bad, of course. But given the enormous popularity of buybacks
nowadays, those that are harmful probably outnumber the beneficial.

Those who run companies like buybacks because they make their earnings
look better on a per-share basis. When fewer shares are outstanding,
each one technically earns more.

But a company’s
overall profit growth is unaffected by share buybacks. And comparing increases
in earnings per share with real profit growth reveals the impact that buybacks
have on that particular measure. Call it the buyback mirage.

Consider
Yahoo. The company has bought back shares
worth $6.6 billion between 2008 through 2014, according to Robert L. Colby, a
retired investment professional and developer of
Corequity,
an equity valuation service used by institutional investors. These purchases
helped increase Yahoo’s earnings per share about 16 percent annually, on
average.

But a good bit
of that performance was the buyback mirage. Growth in Yahoo’s overall net
profits came in at about 11 percent annually.

Given these
figures, Mr. Colby reckoned that Yahoo, if it had invested that same amount of
money in its operations, would have had to generate only a 3.2 percent after-tax
return to produce overall net profit growth of 16 percent annually over those
years.

Some companies
argue that the money they spend repurchasing stock is a shrewd use of their
capital. And given Yahoo’s track record in recent years, its management team
seems to have had a hard time identifying profitable investments.

But Mr. Colby
pointed out that buybacks provide only a one-time benefit, while smart
investments in a company’s operations can generate years of gains.

Yahoo did not
reply to an email seeking comment about its buybacks.

This analysis
may be of interest to Starboard Value L.P., an activist investor that is a large
and unhappy Yahoo shareholder. On Thursday, Starboard nominated nine directors
to replace the company’s entire board, saying its current members lack “the
leadership, objectivity and perspective needed to make decisions that are in the
best interests of shareholders.”

In a statement,
Yahoo said: “The board’s nominating and governance committee will review
Starboard’s proposed director nominees and respond in due course.”

Yahoo is not
alone. Mr. Colby conducted a cost-benefit
analysis of 26 companies buying back stock
versus using that money to invest in a business.

He found that
McDonald’s was another problematic example. Since 2008, McDonald’s has allocated
almost $18 billion to buybacks. This has helped to produce 4.4 percent increases
in annual earnings per share over the period. To equal that growth in overall
earnings, the company would have had to generate just a 2.3 percent return on
the money it spent buying back stock, Mr. Colby estimated.

Last November,
Moody’s Investors Service downgraded McDonald’s unsecured debt rating, citing
its
plans to increase its borrowings in part to
fund future buybacks.

Becca Hary, a
McDonald’s spokeswoman, said the company had a “balanced and disciplined
capital-allocation strategy that promotes long-term value for our shareholders.”
She cited McDonald’s plans to invest $2 billion to open a thousand new
restaurants and “to reimage 400 to 500 locations” domestically.

In an interview,
Mr. Colby said his research “confirms my suspicion that while buybacks are not
universally bad, they are being practiced far more broadly and without as much
analysis as there should be.”

Perhaps the
crucial flaw in buybacks is that they reward sellers of a company’s stock over
its long-term holders. That’s because a company announcing a repurchase program
usually sees its stock price pop in the short term. But passive investors, such
as index funds, and other long-term holders gain little from the programs.

Especially
problematic are buybacks financed with borrowed money; repurchases of stock made
at prices above its intrinsic value are also dumb.

Another hazard:
companies that spend billions to repurchase stock without substantially
shrinking the number of shares outstanding. In these circumstances, prized
corporate cash is used to offset stock grants bestowed on company executives in
rich compensation plans.

And there are
plenty of companies whose buybacks have simply left them with less money to
invest in more promising opportunities.

“By throwing
away money on buybacks, companies are giving up on the ability to grow in the
future,” said Michael Lebowitz, an investment consultant and macrostrategist at
720
Global in Chevy Chase, Md.

At last, some
investors are stirring on this issue. Domini Funds, a mutual fund company, and
the
A.F.L.-C.I.O.’s investment funds have
submitted shareholder resolutions on share buybacks at
3M, Illinois Toolworks, Target and Xerox
this year.

The proposals
ask the companies to adopt a policy of excluding the effect of stock buybacks
from any performance metrics they use to determine
executive pay packages.

“We’re not
against buybacks,” said Adam M. Kanzer, a managing director at Domini. “The
question is at what point do buybacks become excessive and when do they
undermine the long-term value of the company?”

At 3M, for
example, research and development expenditures plus strategic acquisitions have
totaled $22 billion over the last five years, Mr. Kanzer said. In the meantime,
the company’s buyback program has cost $21 billion.

“When the
buyback almost equals all the other expenditures, it makes sense to ask
questions about whether there’s a more constructive way to invest that capital,”
Mr. Kanzer said.

Asked about
these questions, Lori Anderson, a 3M spokeswoman, referred me to the company’s
proxy filing, which stated: “We believe these concerns are unfounded, as
demonstrated by our long-term track record and our balanced capital-allocation
approach.”

A group of
institutional investors will also convene soon to examine the pros and cons of
buybacks. The
Shareholder Forum, which conducts
independent programs to provide information that helps investors make sound
decisions, is starting a new program on the topic.

“You really have
to ask why a company’s board decides to return a big chunk of capital instead of
replacing managers with ones who can figure out how to develop the operations,”
said Gary Lutin, who oversees the Shareholder Forum.

“If the board
doesn’t think it’s worth investing in the company’s future,” Mr. Lutin added,
“how can a shareholder justify continuing to hold the stock, or voting for
directors who’ve given up?”

A version of this article appears in print on March 27, 2016, on page
BU1 of the National edition with the headline: Sacrificing The Future
For a Mirage.

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Shareholder Forum™
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programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.

This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
Summary. Each
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.

This Forum program was initiated to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices, rather than investor decisions relating to only a
single company. The Forum may therefore invite program
support of several companies that can provide both expertise
and examples of leadership relating to the issues being
addressed.

The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.